Video - Bitcoin Cryptocurrency Crash Course
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My name is Andreas Antonopoulos. I specialize in Bitcoin. Like most experts and specialists, I have only been specialized in Bitcoin for a very short period of time. I have however been involved in computer programing since I was ten years old. I've been involved in cryptographic currencies and digital money since the late 80's and early 90's. I was involved with several conferences in the early 90's when at a time cryptocurrencies were very new and a lot of attempts were made to introduce cryptocurrencies such as DigiCash and (Inaudible 00:00:52) cryptocurrencies. . So I've been involved in cryptography and security for two decades now. I specialize in computer security and cloud systems as part of my day job and as a consultant. And I work in security for many years. Around 20ten being in a startup having just recently survived a recession I decided that I'd had enough inventing useless crap for banks and defense companies and I want to do something meaningful with my life. Fortunately, Bitcoin came around and I've kind of dedicated my professional career to Bitcoins since -- and that was September of last year, dropped everything else and just devote myself fulltime to Bitcoin. As of a couple of months ago I signed contracts with O'Reilly Media. . So I'm currently writing The Bitcoin Book, The Animal Book for O'Reilly. I'm hoping you're all going to buy it. And I'm going to pitch it at every opportunity I get. . So that's my background. I'm a coder, a hacker, an entrepreneur. I've started six businesses like most startups fail most of them. But succeeded enough to keep going and keep starting the next thing.
My interest in Bitcoin is not because I'm a libertarian. I'm not really much of a libertarian, at least not in the capital L term. I'm more of a 90's establishment (Inaudible 00:02:26). And I'm sick and tired of people using my money to ends -- then basically stealing and rent seeking and blowing up to make more money and not actually improving the world. . So that's why I've involves in Bitcoin. My primary motivation for Bitcoin which I've made into a slogan is the other six and a half billion. That's why Bitcoin is important to me. It's because of the seven and a half billion people on this planet only one billion people have access to banking facilities, banking services, credit, checking capabilities or any ability to send or receive money internationally. That's not by accident. And it's not because they don't have money. And it's not because they don't have productive capacity. It's because of politics and infrastructure. And my reason for being interested in Bitcoin is because I think Bitcoin could change that. Because simply with the introduction of not even a very smart, smart phone you can introduce banking services throughout the world. And you don't even need connectivity or 24-hours electricity to do so. . So for me Bitcoin is all about taking money from the realm of governments where it's existed only for the last hundred years or. So and freeing it from those controls and corruptive influences and basically turning money into a technocratic, scientific, mathematical system that exists independent of governments, independents of corporations, independent of corrupting influences and exists simply as a means that can all trust and depend on in our day to day interactions. And I think Bitcoin fulfills some of those characteristics. I'm not sure Bitcoin is going to be the cryptocurrency that wins. I'm sure that cryptocurrencies are here to stay. Cryptocurrencies were invented and once they were invited they're not going anywhere. They are a significance invention. I think eventually cryptocurrency will be recognized as probably the most important invention in economics and technology in the 21st century since the introduction of the internet. So cryptocurrencies, I would call in general currencies that depend on their operational cryptographic primitives and a common understanding of how the software works. Bitcoin is a very special type of cryptocurrency in that it is the first cryptocurrency that is based on a distributive proof of work principle that is captured in a distributed database called blockchain.
The concept of distributed proof of work is what makes Bitcoin special. Cryptocurrencies as I mentioned before have existed since the late 80's. And they all suffered from the very same problem which ultimately led to their demise and which is the main problem that Bitcoin solves and the reason behind its success. And the problem was that while you can use cryptography to establish ownership of a digital asset you can't prevent that digital asset from simply being copied and reused again and again. You can't stop the double spend. So all cryptographic money systems before Bitcoin use the third party, central third party to do reconciliation at the end of the day., at the end of the period or at some point. You needed a trusted third party to do both issuance as well as reconciliation of transactions to ensure that no one was doing unfair dealing, double spending within the cryptographic currency. So the major invention of Bitcoin is the blockchain. And what the blockchain did was it enabled a network of distributed nodes to achieve consensus to agree on the common state of the network by each proving that they had participated in that network through a system called proof of work. And proof of work is simply like solving a very difficult problem and then proving that you solved it. Let me give you an example. Take a Sudoku. Everyone's familiar with Sudoku. It's actually hard to figure out which numbers fits into the squares, right. It's very easy to check if the Sudoku was right. You could just add up the rows and columns and if it's right that's right. Easy to verify, hard to prove, hard to solve. So the proof of work that's used in Bitcoin is exactly the same. It's very easy to verify. It's very hard to solve. What's special about it is that it is as hard to solve as it takes ten minutes. That's the base. So it's always ten minutes hard. If there is more computing it'll get harder. So it still takes ten minutes to solve. If there is less computing is going to get easier so it still takes ten minutes to solve. Basically the main Bitcoin proof of work problem gets solved once every ten minutes. That is the heartbeat of the Bitcoin network. And what it allows, it allows the entire network to achieve consensus every ten minutes on the latest state of the network and the transactions in that networks. Every ten minutes the entire network achieves consensus on a block and says the transactions up to this point are verified and agreed to by everyone. And then another block of transactions is added on top which depends on the previous one. And as consensus is achieved on this new block it actually strengthens the security of the previous ones. So you actually build the security of the network as you gone up.
To give an understanding of how this works the amount of computing power it would take today to break Bitcoin in capital terms exceeds $400 million. You would have to invest half a billion dollars almost just to break Bitcoin in terms of being able to calculate the proof of work faster than the rest of the network. With that you would be able to fool the network for ten minutes. And it would cost you $400 million. For the next ten minutes you would have to continue to fool the network and hope that no one noticed. So it's a very robust network from that perspective. I think the characteristic that most appeals to libertarians specifically is the fact that Bitcoin is affixed issuance currency. It has a predictable rate of issuance that starts off at 50 Bitcoins per block every ten minutes. And then reduces every four years. It was reduced in 2012 to 25 Bitcoins. And 2016 is going to be reduced to 12 and a half. And 2020 it's going to go to whatever that is. And I bet our computer science and mathematics can do it quickly. This is my head. Six and a (Inaudible 00:09:29). Thank you. If you follow that pattern in 2140, all of the Bitcoins gets issued. And the network will continuously self-balance through that process. It will always takes ten minutes to issue each block and each blocks always gets the same award which diminishes by 2140 have all of the coins issued. If you work out the economics right now, today the Bitcoin network is running at a rate of inflation of about 2%, which means that there are Bitcoins created -- about 2% new Bitcoins are created every here. The available supply of Bitcoin increases by 2%. However, as the demand for Bitcoins increases far faster. And as a result this creates a persistent deliberate deflationary effect in this currency. So the deflationary characteristic of this currency is the idea that no matter what there will be 21 million coins issued. And those 21 million coins will have to grow in value to encompass the value of the entire Bitcoin economy as it stands. And that's not just M Zero. You have to realize that the Bitcoin economy has M Zero, which is the liquid Bitcoins that are circulating. But just like any other currency it also has a One M, Two M, 3 and forth. You can issue off chain transactions. You can issue Bitcoin that aren't reconciled with 21 million. You can effectively do forms of reserve, fractional reserve banking with Bitcoin. So the value of Bitcoin is greater than the number of Bitcoins in circulation. Today that puts it at about 1.2 million or 1.3 as of this morning. And if you assume that Bitcoin continuous to do well and in terms of a currency Bitcoin is doing well as long as it hasn't died, you know, it is technology. If it continues to do well and continues to grow it has to encompass a bigger economy. And therefore by definition will deflate. So that's the basic concept. That's what makes Bitcoin very appealing to people because they know that you have a predictable issuance. Therefore you have a predictable value curve. Therefore you can make investments against that knowing that no one can go in and inflate that currency to shit which appears to be happening to every other currency in the world simultaneously in a grand concerted experiment to the bottom.
So that's why Bitcoin appeals to libertarians. I think it appeals in general to anti-establishmentarian just like myself simply because regardless of your political affiliation, the fact that Bitcoin is technocratic, scientific, predictable, mathematic currency it's not out to the whims of any government. But also it's not up to the control of any corporation. It's not up to the control of any individual. It's not up to the control of any group of hippy coders. It's not under control of anyone. It is and always will be controlled by the consensus of everyone who is participating in this grand experiment of Bitcoin. And that's what makes it special. Because if you could trust and read the code and know how it works, then you can invest in the idea of Bitcoin surviving manipulation. Now since the introduction of Bitcoin, more than a 100 alternative coins have emerged. These so-called alt-coins are very, very interesting because what they represent is the evolutionary environment around Bitcoin, the other species. And within the currency system every currency is judged effectively by a fitness function. Is it a currency that is useful for everyday transactions? Does it function as a store of value for long-term use? Is it predictable in terms of volatility so it could be used for somewhat medium-term holdings in terms of investments or capital investments? Does it have large economies backing it so that you can depend on it having a staple value. Does it have the gross domestic product of a large economy behind it? So all of these characteristics exist in the ecosystem. And every currency in fact is judged by that fitness function. Traditional fiat currencies skip that whole thing by establishing a buy your market because you have to pay your taxes in fiat. And the government buys the fiat. By establishing a legal domain and by establishing a fixed value. Cryptocurrencies have to compete directly. If nobody likes them they pick a different cryptocurrency. There is plenty to go for. The cost of transitioning from one cryptocurrency to another is the cost of converting that money into the new cryptocurrency. And because they're very, very fungible it's very, very low. So with currency exchanges you'll see charge is less than half a percentage point to 50 basis points for transactions directly between virtual currencies. Very, very fungible, very easy to exchange.
So I said in the beginning I'm very invested in Bitcoin as a cryptocurrency but not necessarily Bitcoin. Because if Bitcoin dies it will be very quickly replaced by something else. When I look at Bitcoin I see a very similar evolution as we've seen in the area of peer-to-peer networking which is also very heavily used within Bitcoin. So the first generation of peer-to-peer networking Napster, was suffered from a very fatal flaw. It was a centralized network controlled by a centralized organization which was a registered corporation. It got shoot out. The second version Casa was a centralized corporation with a centralized piece of software but a decentralized network. It got shoot out. The third one was a decentralized network with centralized software and a decentralized organizational structure. It was harder to shoot. By Nutella, you had decentralized network with decentralized software and decentralized companies. Now you had to go after individual users. And with BitTorrent (Inaudible 00:16:11) even harder to do. So what you had effectively was an evolutionary process played out over a period of 12 years in a fascinating effect whereby the government attacked peer-to-peer systems. And help them evolve into a fitness function of surviving government's tax. Right. And the end result was that the government cultivated BitTorrent and made it an absolutely unstoppable network protocol. Then you have the assistance of governments that really don't give a damn about free speech, you know, niceties like that. So they started attacking peer-to-peer networks with port filtering and protocol filtering attacks and things like that. So BitTorrent gets encrypted. BitTorrent starts port hopping. I predict that something very similar will happen in the space of Bitcoin. It is extremely easy to set up an alternative coin that solves exactly the problem that Bitcoin is failing at. Whatever that may be at the time. And if the problem is big enough to overcome the network effect of Bitcoin, everyone will flock to the new coin. As long as you have a system where you can fungible convert Bitcoin to this new coin. So cryptocurrencies are here. Cryptocurrencies are going to be part of the financial future of this world. They're going to be tradable commodities. They are an asset class of their own because they're not commodities. They're not strictly currencies, they're not stocks. They really format as a class of their own. They're here to stay and (Inaudible 00:17:58) Bitcoin. So questions.
I'm not here to tell you that Bitcoin is a safe investment, far from it. Bitcoin is not a safe invest. Bitcoin is the first experiment in a global distributed currency. This is stuff that's never happened before. We have no idea how this is going to work out. So if anybody tells you that Bitcoin is a sure bet they're lying. And they're lying blatantly. So I think a lot of the people in Bitcoin have a very palpable sense that they are participating in history. This stuff has never happened. We've never had a currency that can enable distributed consensus without a third party. We've never had a successful digital currency that doesn't have a sovereign actor behind it. we've never had a currency that can be instantly transmitted across borders without controls. And we've never had a deflationary currency that's deflating not because of a complete collapse in demand but deflating because of restricted supply. So all of the things that we know or think we know about currencies we have to rethink. Like for example a lot of people say, oh! Bitcoins deflationary. that's terrible for currencies. Yes, it's terrible for fiat currencies because the reason we've seen deflationary currencies in fiat or the only deflationary currency we've seen are ones where there is a complete collapse of demand. Because you can't have a fiat currency deflated. You have unlimited printing capability. Why on earth would you like to deflate? Unless there is a complete collapse in demand. So the only circumstance under which fiat currency deflates ever is catastrophic collapse in demand. So is catastrophic collapse in demand a bad thing. Well, yeah of course it is. That doesn't mean deflation is bad. It means catastrophic collapse in demand is a bad thing. The only time we ever time we've ever seen deflation is under those circumstances. Bitcoin is a very risky investment. I'm absolutely hopelessly imprudent with my Bitcoin investment. I'm invested way more than I should be. I'm invested professionally. I'm invested with all of my savings. And I'm writing a book. And I've actually got a second book proposal which is why Bitcoin failed and how we can get the next one right. Because if it all goes to shit I've got a (Inaudible 00:20:42). So honestly speaking I'm invested in three different cryptocurrencies. And any period of time I think it's -- I like to have investment in three crypto currencies. I'm also invested in traditional investment, vehicles, although less so. And Bitcoin could very much collapse in value. What I can guarantee for you, no one can confiscate your Bitcoin. No one can steal your Bitcoin. No one could bail in your Bitcoin. No one can bail out your Bitcoin. Right. No one can seize your Bitcoin or forfeit your Bitcoin nor inflate it into paper money.
Well, what happen to the customers of Mt. Gox that -- when they close down?
They seize their dollars.
They didn't close it down. It's still work quite nicely. It's actually, you can still --
I mean, they went after certain customers, right?
No, they went after the fiat currency because when you're a currency regulator and the only tools you have are fiat currency regulated tools and you're trying to go after Bitcoin, the only thing you can hit is the fiat currency inputs and outputs of Bitcoin. And that's what they hit. But this is really fascinating. Here is what happens. You have an exchange --
Can you give a little bit of background for people who don't know about --
Never heard (Inaudible 00:22:10).
Mt. Cox is currently by volume about 50% of the traded volume of Bitcoin. It's an exchange that is located Shibuya neighborhood in Tokyo, in Japan. And as I said it represents more than 50% of the trading volume.
(Inaudible 00:22:33) -- is that what (Inaudible 00:22:36)?
So no, actually in fact the blockchain is where Bitcoin lives and that is shared by everyone. Mt. Gox surprisingly enough almost all of the Bitcoin transactions are off the blockchain. Until you withdraw a Bitcoin from Mt. Gox to spend it, it doesn't exist. It's like fractional reserve. It's pay per orders. They don't settle the Bitcoin into the blockchain until you try to withdraw it. Until that time it's just a holding again --
Yes, exactly. So Mt. Gox is an exchange. Just like any foreign exchange you can sell US dollars, Euros, Yen and I think about six or seven other national currencies. If you want to buy Bitcoin with US dollars, probably your best bet is to use Coin base, Coin base. Com. Coinbase is a US provider that is based here in San Francisco. And they will connect directly with a CHD or bank accounts. You can withdraw money from your checking account buy Bitcoin. Easy-peasy. Part of the reason it's difficult to buy Bitcoin is because Bitcoin has a very interesting characteristic you don't see in any other currency. All of the Bitcoin digital transactions are non-reversible. Bitcoin is literally digital gold or digital cash in that if you drop it on the floor and somebody picks it up it's theirs. If you leave a suitcase full of money out there in cash. You can go to Cupertino Police Department and say help me recover my suitcase full of cash. Right. It's completely steal able. So Bitcoin is very much the same, right. And that means that transactions can't be reversed. If I send Bitcoin to a specific address. It's like teleporting gold, you know, I put it on the transporter pad. I hit the stuff. Now it's on the other guy transporter pad. If they want to send it back they can. But, you know, there is nothing I can do to get that money back.
There is no authority you can appeal to --
There is no authority to appeal to.
Like FIR or something.
There is no central third party. Because if there were such a party, that third-party is counterparty risk to the recipient of the money. And that's the fundamental problem. Now just because of the problem of reversibility of digital transactions 40% of the cost of running Visa and MasterCard and American Express is fraud prevention. That doesn't exist in Bitcoin. Its caveat emptor. You gave them your Bitcoin, you gave them your Bitcoin. If you trust someone else with your Bitcoin it's your loss. However, with Bitcoin you can be your own bank. o you don't need to trust any other counterparty. I store 5% of my Bitcoins online, 95% of my Bitcoin I encode with secret keys that are printed on paper, so call paper wallet and I store them in a safe. Those Bitcoins don't exist online, cannot be redeemed online, the keys have never been online. They can't be seized, they can't be stolen, they can't be hacked. They're in a piece of paper. And so yes.
I have a question and or comment with regards to can't be hacked. I know recently there's been some issues with Trojans accessing CGMiner and emptying out people's wallets.
No one know what you're playing with that because technically you can't be hacked and have your wallet empty.
Not if its on people because --
Not if its on paper, okay. But if you keep it conventionally which is, you know, on an online wallet, which a lot of people do then if you have it on your computer store locally then, you know, you can get backdoored.
Yes, you can get hack. So this is a really key point. Bitcoin opens a whole brave new world of computer hacking. So up to now if you are a computer hacker and you've compromised a network of machines, a botnet. You can monetize that by making them generate spam. Now you can monetize them by making them mine Bitcoin. And that's a much more direct, much more efficient way to monetize the botnets. And that changes the game for hacking forever. Also how many of you feel comfortable that your computer is secure enough to store your entire financial net worth. I'm a computer security expert with more than 20 years of computer security experience. I would certainly not put my entire net worth on my computer. And I'm pretty good at keep it secure. I don't trust that. I have a (Inaudible 00:27:20) my camera. I assume it's compromised. I assume everything I'm doing is monitored including my pass phrases, including my keys and everything like that. So when I use my Bitcoins I boots on to a completely brand-new machine off a CD. I print paper wallets on to a printer connected with USB completely off the network. And then I transmit those Bitcoins to those keys. And those keys have never been online. That way I know no matter what my computer gets hacked, the websites that I use get hacked my money safe. And so that's one way but there are significant problems with Bitcoin. This is still an experiment. If you try to introduce Bitcoin into the common culture with the insecure computers we have today with lack of upset corporation security, common computer hygiene and all of that it would cost chaos. You can't just take general-purpose computers and make them Bitcoin wallets. Not unless you know what you're doing. So what we're seeing is gradually this emergence of this entire industry for hardware based Bitcoin wallets that are tamper proof, that can give you a certain physicality to this digital system. Because at the end of the day it's much easier to secure physical system than it is to secure digital system safe. You can take your Bitcoins (Inaudible 00:28:42) physically. Then you can apply physical security and that's some things that we have experience with. Hundreds of years of experience, a thousands of years of experience of applying physical security, not much experience applying digital security. If you look at Bitcoin as money for the internet you're missing the big picture. Bitcoin is the Internet of money. It is a platform, a protocol, a transaction language and a network that enables a whole series of overlay protocols, APIs, applications, transaction types, novel financial instruments even to be built on top of this. Imagine a situation where Bitcoin was used as a proof of State reserve currency for more nimble real-time transactional currency for example. Imagine a Bitcoin where you use the transaction language to create escrow transactions or trust fund situations. And you can do that programmatically, right. Rather than doing through legal instruments as you do with fiat currencies. In the sense of Bitcoin you can implement financial instruments programmatically. And that enables all kinds of innovation without prior permission. Because you don't need to permission to access a network. And so it unleashes the kind of innovation that you saw with the internet because it becomes a platform for enable money. If you take that platform (Inaudible 00:30:15) and give it to a world where six. and a half billion people have never had financial services magic stuff happens.
The concept of the blockchain allows you to prove that certain activities occurred on or after a certain date in a wave of the entire network agrees that they did. It's a distributed secure timestamp database. And a distributed secure timestamp database hasn't existed before as a computer science algorithmic structure, if you like. It is as big as concepts like eventual consistency or replicate databases or distributed systems. It provides a computer science fundamental structure that allows you to bring a distributed system to a -- using a heartbeat which in the case of Bitcoin is every ten minutes. Re-converge consensus of the network on a common shared state without a third party. That's a revolutionary computer science invention. And it allows many modes of use other than currency. So for example, one of the things you can do is at a station in the form of a notary. You can do digital notarization of assets. One of the projects I've been working on is paper wallets. And when you're building paper wallets you are building an instruments that people will encode keys on and will then send money to. And will then have to trust five years, a decade. This is like the safe-deposit box, cold storage, right. So it's very important that you trust the code that generated those keys. Very recently in Bitcoin we had a significant security breach. The acquaintance has so far survival all of its security breaches which is why (Inaudible 00:32:14). But --
It was in May, right?
No, this one was like two weeks ago. Android has a bug in Java. And a specific module in Java called secure random number generator. As you can imagine secure random is a rather important (Inaudible 00:32:35) in Java. And if you have a bug in that one it causes problems. If you're familiar with random number generation, the biggest problem with random numbers is you never know if a random number is random, right. So if you ask me generate five random numbers. And I said six, six, six, six, six. Great. That's a perfectly random sequence out of the billion numbers I was going to generate. It just so happened that the first five I mentioned where the number six. You have no way of proving otherwise, right. Random number generator is only as good as you can keep trying and testing the answer. Anyway android had a horrific mistake whereby it would give you the first random number with 256 bits of entropy and it would give you the second one with eight bits of entropy. And that means it's pretty much the same as the first number. And because a transaction signature in Bitcoin is a secret exponents times random number. If you had two signatures in sequence with the same random number you can figure out the secret (Inaudible 00:33:47). And that's bad.
with a structure called the Merkel tree. So --
What is it?
A Merkel tree? A Merkel tree is named after a guy. His last name is Merkel, M E R K L E. He invented the data structure which is a binary tree where each root node has two children. And those children are X or hash, exclusive that the hashes of the two children are exclusive (Inaudible 00:34:28) and hash into the parent. Bottom line. Think of a tree where you can summarize entire branches by the parent. So you pull up a branch, the Bitcoin works its way internally. So that when you sign a block with your proof of work you're not signing every transaction in there you're assigning the root node of the tree, that has two children which are the first two transactions. Each of which has two children which are the next two transactions, etcetera, etcetera. And so the Merkel Tree encodes all of the summarizes, all of the previous signatures into one.
First of all, if you submit the transaction to them or if you're on their own network you're going to see it go out. So then they can verify, it immediately -- if you don't submit it to them and it has to actually propagate the network until it gets back. So maybe it takes a few seconds, just like an email but not more than that. I mean the propagation time across the entire network is no more than ten seconds.
I think it's a confusion between confirmation --
Conformation versus yeah, okay. So when you create your transaction its broadcast to everyone on the network. Now they can immediately check and see if the keys you're using correspond to a value. What they can't know for sure is whether you've already spent that value. They will trust that transaction until another block has been mined, one conformation, or two blocks have been mined, two confirmations, etc. on top of that. Because then in order for you to double spend you'd have to go back and remine those two blocks. And because that takes proof of work. Because that proof of work takes 500 terrahashes of work to do today. No one individual could do it. In order to remine two blocks you have to spend $400 million worth of computer power. So there is a difference between confirmation and propagation. The propagation of the transaction is instant. Like as fast as an email, maybe a few seconds across the entire network. It takes 10 minutes for the first confirmation. It takes 60 minutes for full confirmations. Well, guess what? It takes a week for Visa. They can reverse that transaction up to a weeks if you're the merchant. You haven't received that. Visas confirmed that money but it's not yours. It will be yours until a week later they've confirmed that that person who gave the card hasn't reversed that transaction. If your a merchant you hate Visa. Because a big chunk of your transactions get reversed and cancel especially if your card is not present. And you love Bitcoin because they are irreversible. So --
Do you love Bitcoin?
You love Bitcoin because the transactions are irreversible. You get that money it's your.
So it doesn't matter when its confirmed?
When it's confirmed your -- what you're saying is --
Because the person is long gone.
-- at zero confirmations, right, all I know is that the network has propagated this message. It's one confirmations. now I know it would have taken $400 million worth of power to fake that transaction.
How long did he said it take, how long, ten minutes?
Ten minutes for the first conformation.
Well, I mean, you can't wait ten minutes to confirm transaction.
If you sign the transaction I can verify that signature instantly. Why? Because I have the whole blockchain. I can't confirm that the entire network will accept that transaction is valid and that you won't try to double spend it until ten minutes have past. But I can confirm that you actually have the Bitcoins. That's the difference. I can independently verify that you have the Bitcoin because I can verify your signature, I can verify the outputs. What I can't verify is that you didn't in the ten minutes I'm waiting spend it again.
And you're saying that risk is acceptable to most merchants?
That's risk diminishes by $400 million dollars per ten minutes. Is it acceptable for merchants compared to Visa? Absolutely because Visa, a week goes by and they reverse your transaction and then what do you do. I think it's very important to realize that Bitcoin is not competing with perfect. One out of every 100 $20 bills in your pocket is counterfeit. And you don't care. Because you don't depend on perfect security or even perfect detection. You depend on 180, one out of every 100 or one out of every five hundred retailers applying a UV pen or applying some counterfeit detection mechanism. And through that gradually withdrawing counterfeit money out of the economy to a level where the overall trusts you put into the currency that someone will accept it is good enough. That how currencies work. They don't work on perfect security. They work on good enough that when I give it to the next person I can turn around and shoot. So as long as you achieve that level of security it's good enough. With Bitcoin we tried -- we get sometimes into these theoretical. What would happen if the NSA put $400 million of computing in order to steal your coffee. They would steal your coffee. But there is probably easier ways to do that and they could do this a lot easier with a counterfeit $20 bill. So we have to compare it to what it's replacing if you think it is replacing fiat currency.
Bitcoin is not anonymous at all.
So it's the (Inaudible 00:39:58). Why that's the case and because obviously it appears at least to some extent to be (Inaudible 00:40:06).
So the blockchain is a global ledger. The way it works is that every transaction ever created goes into the blockchain. The blockchain starts in 2009 with a specific transaction that was created by the founder or the creator of Bitcoin and every single transaction after that is in the blockchain. So if you have a copy of the blockchain you have every transaction in Bitcoin that has ever happened since August 13th of 2009. You can track from that very first transaction every single Bitcoin is first created. Its genesis occurs in the block with every new block when it's minted. Essentially, it doesn't have a serial number but from that block that Bitcoin is then sent to the miner who earn it who then sells it or buy something with it and gives out transactions to everyone else. All of those transactions go into the blockchain. Right now there are 6.8 million chunks of little bitcoin coins owned by some two and a half million Bitcoin addresses. We have no idea who owns each Bitcoin address but you can track every single Bitcoin through every single step. So if you figure out what my address is you can then backtrack every Bitcoin I've received. Every Bitcoin I've sent. And figure out what transactions I've made. As it stands today Bitcoin is a privacy nightmare and we need to fix it before it goes worldwide.
I created an address every time I export Bitcoins out of Coin base.
You can create an addresses every --
You can create many addresses as you.
But they're still tied to your bank account ultimately. And Coin base got a record of it.
It's tied to the previous address with which you transact it. So simply by association or taint you can associate addresses to each other and basically track.
It's a fully trackable system. It's all a metadata you would love in order to just completely violate everybody's rights.
But it still relies on establishing the identity at some point. So when you hold a coin your name is not in the block.
The address is. So if you associate that address with an identity then you can associate with all corresponding transactions to that identity. So there are two ways around this. The first one is a system of services that exists that are called mixers or mix masters. And similar to mix masters on Freenet or email Mixmasters and the Cyberpunk (Inaudible 00:42:52) what they do is they take a whole bunch of Bitcoin.
They go bluuur! And then they redistribute them out as outputs. And it messes up the taint. It retains every Bitcoin with every other Bitcoin until everything is so tainted the taint is no longer useful. So you throw them all into a big tumbler and you tumble them with all the other Bitcoins.
Even staggering the time.
Even staggering the time. It's still not good enough. It's nowhere near good enough. We need cryptographically secure remixing. And we need to do it by default and we need to do it on every transaction. And we need to do with a new address. Yeah. I mean, and most of the underlying communications (Inaudible 00:43:40).
And so the proof of work as a process does two things. One, it creates new bitcoins. Two, it secures the existing transaction.
Right. Now if the Bitcoins are all issues what is the motivation then to continue ?
Yes. So today every single block comes with a 25 bitcoin reward. And all of the transactions that are included in that block have a tiny little surplus which is the transaction fee or a miner fee. So basically when you make a transaction you say I'm going to take one Bitcoin of mine and I'm going to give point 95 to it. Well, there is a point 05 missing there. That goes to the miner. And by including that little surplus every time in every transaction right now if you look at a block you're going to see that the miners makes 25.125376. Though a point 125376 is all the little fees added up. Now if you imagine with the deflationary environment, eventually those fees will be both meaningful and enough transactions. And if not fewer people will mind. No problem. Difficulty goes down, network recalculate the value of money, mining increases. One of the characteristics of Bitcoin is that none of these things are set in stone. They're all based on feedback loops that are designed to be tight. So it creates efficient markets not by assuming the feedback won't exist but by assuming the feedback will exists and making it as fast as possible. So mining hash power will change. And the network will dynamically adapt so that it's always ten minutes. In fact we're seeing a shocking increase in hashing power right now. It went from 300 terahashes per second in June to 400 terahashes per second. In July, it's 539 terahashes. Today it's basically doubled in two months. And we're talking right now Bitcoin is the largest supercomputer in the world by far, far.
Is that people are buying those dedicated processors top mine them?
Yes. It can't do anything useful. All it can do is SHA-256. But it could do SHA-256 faster than any computer system in the world.
And that's why if you look at mining profitability calculators, Bitcoin is low. It is not profitable. It's at 50% where --
And that's great. Because --
Which is great if you are a miner.
-- your financial system should be profitable if it works properly. A financial services industry that makes eight percent of GDP is proof that it's fucked up and corrupt. Because no financial services industry could extract 8% of GDP as marginal profit if it was working efficiently. It would be much, much lower. They aren't, honestly, they are not generating enough services. (Inaudible 00:46:34) generate services, have tangible value but not 8% of the economy, just the bank.
A Bitcoin transaction involves a transmission fee which is optional in that if you don't pay it your transaction will be picked up on a best-effort when we can get to its basis. If you pay, the minimum transaction is half a cent, that transaction can carry a Bitcoin transaction anywhere from one Satoshi to a billion dollars or more on the same basis. So for half a cent you can transmit globally one Satoshi or a trillion bucks.
On a dollar it's 0.5 percent.
On a dollar, on a billion dollars (Inaudible 00:47:22). But it's fixed fee. That's the beauty of it. And it depends on the transaction cost of the transaction. Now if you try to buy a cup of coffee, this is where it gets interesting. If I'm a business person and I'm a (Inaudible 00:47:36). I understand that Bitcoin is a deflationary currency therefore if you own Bitcoin you're less likely to buy a cup of coffee than to hold on to that for five years and hope that's it worth a thousand cup of coffee. So we're in a tug-of-war. Because I want to hold that Bitcoin just so much as you want to hold that Bitcoin for five years until when it's worth a two thousand cups of coffee. But I also want you to buy a cup of coffee because I own a coffee shop. So I'm going to start discounting my coffee prices until I reach the switch point where my deflationary appetite meets your deflationary aversion. And the discount is just enough to make you buy a damn cup of coffee.
But only for Bitcoins, not for dollars?
But only for Bitcoin, yeah. And we've seen this play out again and again. Because deflation is not a supply collapse but it is built into the currency. Merchants can deal with that. They can bake it into their pricing, add a discount. It's working out at about 30 to 40% discount. So people are discounting 30% on the dollar shipping products. And then making up the difference.
You're saying that Bitcoin is (Inaudible 00:48:49)
I'm going to sell you something. And instead of selling it for $20 I'm going to sell it for $12 or $14.
But I'm going to get paid in Bitcoins now $14 and then --
Because your Bitcoins is going to go up in value.
-- and then I'm going to hold onto it. And I'm confident that it's going to be worth at least 20 or more. And because I'm giving you a really good discount you're willing to get $12 for value now.
So this is exactly how it would work with gold and silver and an inflated fiat currency which would be received for gold.
One difference. You can't infinitely subdivide fiat currency and gold. And you can almost infinitely subdivide Bitcoin. So the complexities and difficulties that come with giving change as the currency continuously deflates go away. So now we're at Bitcoin.
Probably we do that right. You could say an ounce of gold is one unit and you can do a billions of units.
You can't really do a billions.
You can do a billion of an ounce of coin but you can do it off the, you can do it in calculation. You can do it on calculation. I think it's possible.
Well, yeah. But this different. You can do it practically with Bitcoin. I can literally give you one Satoshi.
Yes, that's right.
And with my phone. And I have the capability just like any other Bitcoin client. So another way to think about this is the traditional Fiat currencies have completely separate networks for the transmission of micro payments, milli payments, mini payments, payments, kilo payments, Giga payments, mega payments. Those are separate networks you swift for Giga payments, you use visa for payments you use, you know, something else for micro payments although it doesn't really work that way. But the point is that traditional payment systems are specialized to a specific rate. Bitcoin goes from pico transaction to giga transaction in the same payment network with the same fiat fee. That's never happened before. So the fact that you can actually do that and you know, the fee is half a cent now. But that's completely market-based. So if the miners start discounting fiat the value of Bitcoin goes up, it's going to decline accordingly. So I want to talk a bit very briefly about what I think the key applications of Bitcoin, I haven't mention that at all. I think probably the number one application of Bitcoin is going to be international fund transfer for remittances international remittances. So western union is going the way of Columbia Records as simple as that.
What the union?
Adapt or die. We walked toward extinct basically. So remittances is first, I think then offshoring subcontracting international payments import export and trade connects. Then interbank transfers.
And the reason you're saying it this way is because --
High (Inaudible 00:51:52)
Least efficient. Yeah.
Least efficient, highest friction, highest cost, most demand. So if you take it from that perspective I think remittances is the first you've got to already in existing $115 billion market which on average gets raised between t10 and 30% per transaction. And the poorer the country the worst the fee. So it is a definition of a broken market. And that can be fixed it's fairly.
Now, the other thing that's really nice I think is that, there is a very interesting balance. You can't really do remittances consistency with a currency because eventually you have a fall in power problem. If you keep sending money Bitcoin. Let's say you're converting US dollars to Pesos. And you're sending money from the US to Mexico. Okay, so I'm going to convert US to Bitcoin. I'm converting Bitcoin to Pesos and give Pesos. I can only do that, eventually I'm going to run after Bitcoin demands to Mexico. That's the problem. Problem is that remittances only flow one way. Nobody is sending money back from Mexico. Except all of the rich people are trying to flee. So what you do is you balance remittances with capital flight and so you say hey! we're the Red Cross of currencies.
Why don't they buy
You're having a crisis, here comes Bitcoin.
Aren't they buying other things, food and whatever else?
In Pesos. They don't have a local markets vital in Bitcoins. If they did, yes, you could keep a closed economy. Because we're not at the point of having enough volume to have a closed economy. When Jose here sends Maria some Pesos in Mexico they have to be converted from Bitcoin to Mexico to be usable in the local economy. You can't create an inflow without corresponding outflow. So what you do is you find all of the rich people who have currency controls and balance and confiscatory taxes. And you let them escape with Bitcoin. Now this is already happening in Argentina.
So rich people take their pile of Pesos, convert to Bitcoin and send it wherever they want from --
He look at the remittances, take their Bitcoins into Pesos.
Yes. And that way you have some form of balance. Now, if you look at Argentina for example, Argentina is right on the tipping point. It fulfills the requirements because it has the stringent capital controls, the incredible difficulty of international issues of the very, very corrupt currency in fiscal situation and massive hyperinflation. They've reached the point in currency controls that they've closed some of the last outputs possible to understand how bad this is gotten. People were buying stock on Argentine stock market that was commonly listed also on the New York Stock Exchange. As a way of converting money to dollars. Buy stock here sell it on New York Stock Exchange and use that to move money out of the country. Obviously, very few people can do that.
People are even buying car, new cars are a lot in Argentina today.
As a way of --
As a store value. Yes. Yeah, so --
You don't know when you're driving up (Inaudible 00:55:02) drops (Inaudible 00:55:03)
One of the Argentinian participants in the Bitcoin conference said -- but in order to understand why Bitcoin is powerful you have to watch the scene I saw of two sixty plus aged Argentinian men who had no technical expertise exchanging barcodes with their lawyers over a table to do a Real Estate transaction. Because both of them had their fund outside of the US and there was no way they could convert them. So they did the entire transaction in Bitcoin. And this is people who have no understanding Bitcoin but you give them the right incentive. So the reason I think Argentina is on the cost because it fulfills the criteria, has all of these controls. But it also has educated population, ubiquitous availability of Internet, ubiquitous availability of electricity, ubiquitous availability of smartphones. Those are the necessary preconditions for tipping point. So if what happened in Cyprus happens in Argentina in the next year. They're going to shut every single door they can shut. And there will be one door leftover, the one they can't shut, Bitcoin.
The one thing you said about the remittance is balancing the capital flight. I mean people are just going to hang on to Bitcoin, I mean if you're live in a world that's going apart so fast, why would you transfer it into any Fiat?
Well (Inaudible 00:56:31)
You don't have any disposable income, you're living hand to mouth.
Okay. But --
So if you need to buy milk for the kids.
Yeah. You Buy a milk no matter what.
Yeah but I mean the kind of people that are trying to get their money out of the country for the most part have a lot more money than you could spent.
Oh! Yes that's but the people who are doing the remittances (Inaudible 00:56:45). So --
All that I understand. But they're going to want to hang onto as much as possible.
Oh! they will.
In that environment because it's going to be inflating, it's deflating the value of a Bitcoin can be going up like crazy --
As it's consequent --
So part of the reason why Bitcoin offers a relatively enticing store value is because if you accept that other people will continue to find it useful. And if you accept that other people who have invested in that value will continue to defend the network existence of Bitcoin. And you only need two nodes and some is going to cash out to cash out. Then it instantly becomes a more enticing proposition or some currencies. The key here to remember is there are 192 currencies. Ours is the world reserve and therefore, will be the last to talk. And so if you ask an American is Bitcoin better than the US dollar. The answer is obviously no. And will continue to be no until the very last moment. The last currency will say that. Yes. Is the US dollar and last things really go bad. But the point is to remember that there are not 192 currencies in the world. And some of those are the Zimbabwe dollar, the (Inaudible 00:57:57) transcode. Currencies were literally the intrinsic value of goat shit is greater than the value of your paper money. Because it burns longer. And I remember this from an interview where someone was asking someone in his Zimbabwe café and they had a stack of Zimbabwe dollars like this, they were giving them for coffee and he walk. If the money is worth so little why don't you burn it. And he says because we burn goat dang, because it burns longer. And --
Intrinsic value of (Inaudible 00:58:28)
Yeah. He basically expressed the entire frame monetary policy of the country in one expression, beautiful. Our money is worth less than goat shit. And so if you consider that from that perspective why isn't Zimbabwe adopting Bitcoin? Because they like the other pre-records, pre-condition.
The don't have enough internet and computing power.
Electricity. Even before he smartphones or internet, it's electricity. So you start with electricity then you go to internet then you get to smartphone. And so what we're trying to do is one hand the world is moving up that scale on the other hand Bitcoin is moving down. So now it's possible to use Bitcoin without smartphones. So you can use it with just SMS. Already a company has developed a gateway that connects the Kenyan mobile minutes currency and pesos to Bitcoin. So that everyone who has a pesos automatically has a corresponding and an equivalent Bitcoin account that they can use in transmitting (Inaudible 00:59:24) without setting up, brilliant.
And it doesn't require smartphone.
And it doesn't require smartphone --
Just to (Inaudible 00:59:29)
You can do with SMS.
You just type in the (Inaudible 00:59:31) key.
No. You use a special pin number. They hold your account for you.
It's a centralized as old style banking.
But still part of the Bitcoin decentralized system.
But it's completely fungible for in pesos and completely not subject to currency controls because you can take Bitcoin from Kenya convert your Peso to Bitcoin and from Bitcoin to any currency in the world instantly.
Bitcoin to me it's seem very much like digital gold or --
some kind of precious metal. And today, there is gold which is a store of value and it can be use as (Inaudible 01:00:11) changes you said that. But there is also silver and maybe platinum and cars and real estate and maybe you know, fine art. And all kinds of different things.
Even wheat or whatever.
So gold is maybe the most settings aside Fiat currency. Gold is perhaps the most accepted. But there is a lot of alternative.
And there is exchange values between them.
And they fluctuate. That is all the worst we got it
Same thing with all coins.
So yeah, it was (Inaudible 01:00:37)
There are exchange rates between them.
I think I've said this before but I do not believe that we will face a wall with one cryptocurrency. I think that is unlikely. I think we will either faces a war with zero cryptocurrency where Bitcoin fails and nothing replaces it. It all gets bands. I think that's extremely unlike, I think the most likely scenario is we will face a war with a hundred eighty plus Fiat currencies plus a handful five, six solid global cryptocurrencies competing on a global financial system. And so you have Bitcoin, you have Litecoin which is silver to Bitcoins gold interestingly enough, the creator made a very similar comparison to what you suggested faster transactions, you know, just generally lighter. And so yes. There are some very interesting coins, Primecoin is a coin where instead of a proof of work that uses hashing, it uses a proof of work that tries to discover prime numbers, non mersenne primes using a polynomial prime senne something or other. The second one which is really interesting as Freicoin. And Freicoin is a demurrag coin where if you hold on to the coin it loses value of time. It's a negative interest rate. There is Defcoin or and very solid charity coins where the percentage of the transactions go either to the developers or to named charities or to named organizations. So essentially there is a built-in fee and funding scheme. Essentially Bitcoin is an IPO for the founders. One of the predictions I've made is if it works, Satoshi will be the world's first trillion. My definition.
Nobody knows who he is right?
And not just Satoshi but several other participants in Bitcoin will become the first trillion and that's make sense. (Inaudible 01:02:50) I totally imagine the world where in fact Bitcoin isn't really very good at transactional stuff. So I think it's probably better as a store of value because it's highly deflationary that has advantages for store value but I think it has some disadvantages of transactional economies. I wouldn't be at all surprised if you have a very, very lightweight coin that is used for transactional day to day which is backed as its commodity by proof of stake in Bitcoin. So you own Bitcoin, you use Bitcoin to prove stake to mine the new coin. So anyone who owns the old coin is by definition of means for the new coin or you have one to one change or some of this kind.
And this I want to point this out too. I like how he saying, he foresees so many currencies. What I first see is a little different than that I imagine, I'm heavily I think a lot of the color coin idea. And I can imagine a system in the near future where not only do we have X amount of cryptocurrencies of a pure currencies that maybe derive their value from blockchain or other tasks that they perform for your benefits. But a complete transition from the stock market to the blockchain of all company stocks and shares. And that could be a situation where we've reach the point where you can actually request somebody pay you in GM stock, say if you want to lose all your money. Give me GM stock so can we develop me. But you realized
Stock has currency.
Right. And what I think this kind demonstrate the superiority of cryptocurrency and Bitcoin in general. You could actually in the future here except the currency that is backed by gold and transmitted through the Bitcoin blockchain. Like color coin.
Yeah. You can assign coins to specific weights of verified gold option. Yes. You can do a reserve back of currency again if you wanted to.
But it actually lets the blockchain be the actual the ledger where anything is valued on that.
Yeah. I would say Bitcoin today is backed by silicon at the very basic level because the fundamental way by which Bitcoin is created is through computation that requires either general-purpose computers or special purpose silicon. So if you have silicon you have Bitcoin. So that's the process and that is some scarce. It has a predictable rate of development Moore's law and is Universal. So it's not a bad way to back a cards essentially the Internet is backing Bitcoins.
You talked about it not being a safe investment.
You're a very emphatic about that. I brought up some things that I'm concerned about.
You said now those are on your problem.
What is the problem.
What is the problem.
Oh! There is a couple of problem, the first one is that I expect the regulatory environment to get hairy either over the short term of the mid-term, medium term or both . So like yeah, if you have a currency that can be manipulated someone's made a lot of money manipulating that currency. They're not about to let you go off and play with your rule of the currency that can be manipulated. So does that. Then there is the kind of knee-jerk reaction you get from most lawmakers. So it's Bitcoin can buy drugs.
Cash (Inaudible 01:06:47).
Yes, of course it can buy drugs otherwise it would be very good money, would it? We would have very transactional utility we can't even drugs with it. And that's kind of one of the main commodities in this world. So Bitcoin can buy drugs far less efficiently than you can buy them with dollars. And if you buy drugs with Bitcoin you'll be adding the tiny little Bitcoin on the mountain of dollars that we use to plant, harvest, collect, process, distribute, deliver and possibly roll up and store it up on nose these specific drugs. So the problem is that a lot of the regulators are reacting to Bitcoin in exactly the way they reacted to the internet. Which is this is new this is where this is not under our control therefore it must be bad. Terrorists pedophiles, you know, whatever list on to add, you know, whatever the list is. There is a beautiful cartoon from Bitcoin where there is this guy who is holding a box it says Bitcoin on the front and there is a guy dressed like Uncle Sam that has regulators on the front of his shirt. And then the store, they says how would you like me to wrap this. And it's got this wrapping paper behind is this terrorism, (Inaudible 01:08:00). So there is a very big risk because that's the US government or any other government will start intervening. I think that's probably a lesser risk I think there is a risk that we have some serious bugs that have not yet been discovered that are going to completely fuck off the network. There is a risk that, that together with some other unexpected events will cause a complete lack of confidence. And it all blows up or the people react look quite honestly if tomorrow morning someone blew up a public building and they'd financed, you know, the taxicab to that --
Who's with Bitcoin next morning USA Today Bitcoin finances terrorism. So that's the kind of risks I'm worried about. They're not real practical fundamental problems with the value of Bitcoin. They're all external political influences. But if that happens the Bitcoin is going to slow it down in the US and only in the US and it is going to continue, tomorrow Thailand there was a war, there is no way you can stop Bitcoin entirely.
I would say it's going to speed it up the rest of the world.
Because the more the US abuses its reserve currency, the more attractive Bitcoin becomes everywhere else.
Yes. I was telling Ed's earlier that the week before delivering this presentation at surviving and triumphing over the crisis of socialism. I was doing a series of seminars for Russia today a TV station who are very gung-ho about Bitcoin. And I've been invited by Chinese media to do presentations for them who are also very gung-ho about Bitcoin. So --
Why? Because it sticks, sticking the eye of the US. Because if you're a China you look at this and you say well, Bitcoin might be a reserve currency that nobody controls but the one that we have right now is one that are enemy controls. I'd rather have one that nobody controls.
Even though they don't control.
Even though they don't control. Yeah. Because it's tremendous advantage to control your (Inaudible 01:10:09) .
Did you or anybody or they able to look into who is actually running up the price, you know, the big demanders after Cyprus?
It's far too complex.
Only guess then.
It's a completely global 24-hour very liquid market. So it's extremely difficult to track. And there aren't even analytical tools to tract it right now. So I would say if you hear predictions or even analysis of Bitcoin markets taking a huge (Inaudible 01:10:40) of salt.
You know, first of all it's coming from the same people we didn't see the last one coming. And secondly, they're doing that on the currency where they don't have the necessary tools or importance article experience. So they have no idea.
But sorry, you know, a bunch of articles say oh! it's the Russians who had the money and Cyprus (Inaudible 01:10:59).
But how do they know or they don't.
No, they don't. They don't.
There is a certain where you kind of tell where downloads are happening for certain app you on a phone.
On source boards, they keep download this (Inaudible 01:11:17) country. And we saw a huge spikes of downloads in Cyprus, we saw recently huge spikes and downloads from China. China did a one and a half hour documentary on Bitcoin, Loran on the official TV stations for two weeks. And you do not get one and a half hour documentary unless it's being approved with a highest levels. So it's clear that both Russia and China are now backing Bitcoin from national interest perspective or at least from a, let's find something to annoy the US perspective either way it works to me.
So if we get heavily involved in a Bitcoin we might be aiding the enemy.
Well if the enemy is the American people. Yeah, absolutely, it might grace the enemy. I hope to aid the American people as much as possible, you got my business cart (Inaudible 01:12:13).
Thank for feeding me.
Thank for feeding me, I appreciate it.
Hope you enjoy it.